Blog of Personal-finance-info.org

If you have little or no credit, or are trying to establish credit, it can seem to be an impossible hurdle to obtain credit.  It’s a paradoxical scenario – you must have credit in order to get credit. One remedy that works for a lot of individuals is the idea of a secured bank card. With a secured bank card, you establish a bank account with the card’s provider and put up a cash deposit that will perform as collateral against your spending limit. Your limit will not exceed the amount of your account balance, so the financial institution isn’t risking much. If you fail to pay your bills, the loan company has your cash on hand to pay them.

Still, there are a few disadvantages to the secured credit card. Interest rates are higher than for unsecured charge cards and there may be large annual fees connected with their use. The biggest drawback for a lot of individuals may just be the should have a bank account. For those who don’t have or want a bank account, what can you do if you need or wish a charge card?

The answer may be in the form of a pre-paid credit card. A prepaid bank card doesn’t really involve “credit”, so the name is somewhat deceptive. It’s really a debit card that deducts your purchases from an account that you have established with the card’s issuing company. You sign up, provide a cash deposit, and your card is “loaded” with an amount equal to the amount of your deposit. You’re then free to use the card as you wish, subject to the limit imposed by the amount of your deposit.

While you’re effectively repaying your card’s bills in advance, the card seems to be a normal Visa or Mastercard, and no one will know the difference when you pull it out of your purse or wallet. Many companies offer pre-paid credit cards, and you should research them carefully and read the terms of their agreement carefully. One such firm will provide a card that will submit a record of your transactions to the major credit bureaus, but not all of them will. This is an essential feature if you are young and are attempting to establish credit for the first time.

Fees for these credit cards can differ widely and can be significant. One company that we investigated had upfront costs of $197 – processing fees, application fees and a monthly fee to use the card of $3.95. This company also offered to report use to the credit agencies, which is very important for establishing credit, but they will add an additional $19.95 per month for the service. We think you can do do better by doing a little study.

A pre-paid credit card isn’t the best way to establish credit, but if you have no bank account, it may be your best solution.